Making a moo-ve into livestock trade

Alongside grains and other soft commodities, a lesser-known segment of the commodity world is livestock. Apart from exchange-traded funds and contracts for difference, a few other ways have been devised for Australians to gain exposure to this asset class.

There is a Beef Stock Market in Roma, Queensland, popular among those associated with the livestock industry but actually open to anyone with an Australian business number and an internet connection.

The market sets a price, per kilogram, to buy cattle, and also indicative prices for selling the cattle – one price for when a professional livestock manager suggests it be sold, and one for outside that period. In this way, investors can buy a cow or a herd.

During ownership, investors pay grazing fees – now $1.15 per kilo gained, paid by direct debit every time your cattle are weighed. There is also an agent’s commission of 4 per cent of the full sale amount, a compulsory industry levy of $5 a head and perhaps additional sales costs including transport to market and weighing. Whatever else is left – the difference between the buy and sell price, based largely on the weight gained in the meantime – goes to the investor.

Here is a costed example of how it might work. You want to spend about $10,000 on cattle. The purchase price is $2.42 a kilo, and the average weight purchased is 254.36 kilos, meaning you buy 16 head of cattle, weighing 4069.76 kilos, for $9848.82.

An invoice goes through for payment within 48 hours. While you own the cattle, every few months they are weighed and the portfolio updated with current weights, while your weight-based grazing fee is charged to your account.

Let’s say the average weight gain is 195.37 kilos and fees are $1.15 a kilo; your grazing fees will be $3594.81. Then the livestock manager tells you the animals are in sale condition at an average of 449.73 kilos apiece. If you agree to go at this – the “finished sale price" – the livestock manager goes ahead.

Let’s say they sell at $2.22 a kilo with no additional marketing or transport costs (a farm-gate sale); the portfolio of animals would have been sold for $15,974.41. Once levies, commissions and so forth are taken out, the bottom line is a return of $1811.80,representing a return of about 18 per cent, which would have taken about a year to achieve.

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One of the leading producers of sheep and cattle in Australia is
Macquarie Group
, which is understood to have about 220,000 cattle and 240,000 sheep across more than 3 million hectares of land, all of it held as a method of giving investors exposure to Australian livestock.

This tends to be the preserve of private or institutional investors. An example of a completed fund backed by Macquarie is Paraway Pastoral, formed in 2007, which runs 18 large-scale sheep and cattle stations across NSW, Queensland and the Northern Territory.

Some elements of livestock in Australia are very distinctive to this country, making the local industry a potentially attractive investment.

While Australia ranks second as an exporter of beef globally, behind Brazil, it ranks first by value, “because we get a higher price in recognition of being a consistent provider of high-quality, disease-free meat", Hornibrook says.

Most cattle in Australia are grass-fed, which is cheaper than the feedlock system common in the United States, considered more humane and also reduces linkages to rising grain prices.

Australia has a lot of land to allow a pasture-based system, it is closer to the key Asian markets than Brazil, with cost and time benefits and, more than anything else, it is disease-free.

Australia has never suffered an outbreak of an export-restricting disease, a function of being an isolated island with strict quarantine and a national livestock identification system.

“Once a cow leaves a farm in Australia it has to wear an electronic ear tag," Hornibrook says. “You could be anywhere in the world and order an Australian steak and I could trace it back to the paddock where it was born."

All of these things make Australian beef (and lamb) a very compelling investment case, but for retail investors it can be hard to play. Macquarie does, though, have a track record of starting out with somewhat esoteric investment classes with institutions and private wealth, then gradually offering retail investors exposure to them, so that may change in future.

Meanwhile, the most obvious exposure is through listed companies, the principal example being the Australian Agricultural Company, Australia’s biggest exporter of live cattle to Indonesia.